A 2022 firsttuesday poll asked real estate professionals whether their area was experiencing a housing shortage. An overwhelming 75% of respondents affirmed they were suffering under a severe housing shortage.

Each year, the state modestly adds thousands of newly constructed homes to its anemic housing inventory. In 2021, local governments permitted construction starts for 64,500 SFRs and 52,800 multi-family units. But were each of these new housing options actually solving the supply shortage?

On the west coast — including California — one-in-five newly constructed single family residences (SFRs) are built on the site of a previous house, according to the National Association of Home Builders (NAHB).

These teardown-and-rebuild SFRs are part of the total count of new construction tallied each year in California. However, each housing start on the site of a teardown is simply replacing older, less desirable improvements — not creating additional supply to reduce the state’s housing shortage.

This reliance on teardowns is a symptom of builders’ inability to locate parcels suitable for additional new development. In a 2021 NAHB survey, 76% of home builders reported the supply of developed lots was low to very low, a record for the survey.

California’s lack of available land is the primary result of zoning constraints. Builders are more often forced to deal with parcels containing an existing home. Further, a high share of homes are built on infill sites — vacant, unused lots located within highly developed areas. The share of homes built on infill sites is also the highest on the west coast, with 28% of new SFRs reliant on infill parcels.

In contrast, the rest of the country — where zoning is less a drag for homebuilders — sees a significantly lower share of homes built either on the site of a teardown or on infill sites.

Related chart:

California residential construction starts

Meeting housing demand is not so simple in California

Urban infill and building on the sites of teardowns encourages housing to be built within existing communities, an environmental good. One alternative in place for the past century contributes to urban sprawl by developing into surrounding rural areas, typically without any existing infrastructure. This suburban sprawl trend leads to higher construction costs and less desirable outcomes for homeowners, forced into neighborhoods and housing with fewer amenities and longer commutes.

While building on existing and infill sites is ultimately the better deal for builders and homeowners alike, it slides past the bigger issue — a hostile environment of zoning to exclude others by reducing density levels, not-in-my-backyard (NIMBY) supporters of restrictive zoning to keep out low-income workers, and sycophantic city councils, which collectively make solving California’s housing shortage near impossible for builders.

Only builders can cure the lack of inventory issues, but city councils will not turn them loose.

State legislators have initiated multiple solutions over the years, including creating builder incentives, encouraging accessory dwelling unit (ADU) construction and smoothing the permitting process.

But NIMBY crusaders continue to evade legislative efforts to expand housing in their communities, and the builder headaches continue.

Until NIMBYs find something better to occupy their time than denying housing to their community members, there are only two reasonable possibilities to cure California’s long-term inventory imbalance and general housing crisis:

  • decreased demand for housing, via a reduction in the number of homebuyers and tenants within the state; or
  • meeting current demand for housing with more new construction.

The years beyond 2023 will see a bit of both.

As California’s housing market continues sliding into the dredges of the 2023 recession, homebuyers are putting plans on hold. Fewer homebuyers — along with 2022’s mortgage interest rate hike which slashed buyer purchasing power — has removed all support for home prices.

The next couple of years will see fewer sales transactions and a further decline of home pricing. Mortgage rates will slip gradually while the Fed remains in the fight to get inflation under control. While household formations pause during this time of transition, the housing supply shortage will gain some recovery time — if builders cash in on legislative incentives and remain active during the downturn.

A builder’s worst nightmare is about the prices of homes dropping even as the builder works to complete a project and get it on the market at a price that competes with declining resale homes — yet still delivers a profit for their risk-taking effort. The path to profit narrows during a housing downturn, as we are experiencing in 2023.

Thus, residential construction starts will be held back from reaching their full potential until the recovery from the 2023 recession, with the recovery to pick up steam around 2027. It takes a rising home price market before builders can confidently build and profit – both essential before they are willing to build up California’s housing inventory.

Related article:

California real estate: 2022 in review and a forecast for 2023